With little more than six weeks to go until the end of the 2016/17 tax year, Jack Rose offers investors and their advisers his 10 top tips for weighing up the pros and cons of tax-efficient investments
1. Don't leave it to the last minute
Capacity is limited in some of the most popular tax-efficient investment products and enterprise investment scheme (EIS) vehicles that guarantee investment this tax year - which is relevant for those looking for carry back to 2015/16 - are in short-supply. The most popular ones will fill quickly.
The same is true of the venture capital trust (VCT) market, which has seen a number of the most popular products limit their capacity and, as a result, fill within weeks. Investors who wait to the last minute will be left with limited choice. So do your research early and get the due diligence done as soon as you can - that will mean you are in a position to move quickly when products open.
Often you come across investors and advisers who tend to stick to one provider and/or product that they have used in the past. As with all investments, diversifying across multiple strategies and providers can help to reduce risk.
3. Focus on the investment not tax relief
It is the old cliché of the tax tail and the investment dog - investors should view tax-advantaged investment strategies in the wider context of their entire portfolio and not just as a way to mitigate tax. Any investment worth consideration should stand on its own two feet without the tax breaks. As an example, a VCT can be regarded as an allocation to smaller or micro cap companies and this should be viewed in the context of the investor's wider investment portfolio.
4. Look beyond the tax structure at the underlying investment
Many people regard tax-efficient investments too broadly - effectively as lumped together into an EIS or VCT. There is, however, a plethora of different underlying investment strategies and sectors that can be accessed via each structure - from media, infrastructure, leasing and lending to shipping, managed storage and AIM and the list goes on. Each vehicle will suit different investor profiles.
5. Make the most of independent research
To help advisers and investors research and make decisions on tax-efficient investment, there are an increasing number of sources of independent research and due diligence on managers and products. These include - but are by no means limited to - Martin Churchill's Tax Efficient Review, Allenbridge's Tax Advantaged Investment Reports, The AIC, EISA, MiCap and Hardman.
6. Look at all the charges
It is often easy to miss the additional costs - and these can add up. Don't just look for an initial charge and annual management fee - instead, check to see whether there are dealing and custodian fees. On inheritance tax products, looks for any underlying costs or charges that an investment manager might receive from an investee business for services. Also, check for exit and performance fees, as these can all add up and should be considered. I try to bucket charges into the following three types - one-off upfront charges, ongoing charges and one-off exit fees.
7. Match the structure to investor/client needs
It seems blindingly obvious - but there are key differences between an EIS and a VCT, so it is important to pick the one that will best suit the investment scenario. For instance, if there is an income requirement, a VCT with tax-free dividends might be better the better option. If, however, a client has a large capital gains tax (CGT) liability from the sale of an asset, an EIS with its CGT deferral might be preferable. It is about understanding the benefits of each.
8. Take baby steps
Advisers and investors can often be hesitant about investing in this area of the market - after all, it doesn't make up the main portion of advisers' work. Having said that, tax-efficient investments are becoming more and more relevant for certain clients. This type of investment can be a real value-add for the right client and the minimum investment is often reasonable, so an investor can slowly build up their portfolio without the outlay of significant capital. Most VCTs have a minimum investment size of £5,000, with some as low as £2,000.
9. Consider your exit and investment horizons
A common assumption is that EIS has a shorter investment horizon than VCT - largely because people just look at the minimum holding period for claiming the income tax relief, which is three years for an EIS and five years for a VCT.
In reality, in the vast majority of cases, they are both pretty much the same. People need to consider when the monies are being invested and, importantly, what is the route to exit? VCTs are on the whole more readily realisable than EIS, as they are investments in companies quoted on the London Stock Exchange, while EIS investments are usually a basket of unquoted and/or AIM stocks.
10. Don't view this merely as ‘end of tax year' advice
No doubt the majority of investment in the tax-efficient sector will continue to be seasonal - in other words, as and when people know their tax positions - however, an increasing number are ‘evergreen' products that are open all year round and providers' deal-flow is not tax-year seasonal. So remember - even if VCTs are a bit of an exception to this - you can access many tax-efficient products all year round.
Jack Rose is head of tax products at LGBR Capital
Retired in 2014
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